New Study of U.S. Ocean Freight Law and Puerto Rico Inconclusive

Posted March 20, 2013

A major Federal study released today that examines the application of the primary Federal ocean freight law to Puerto Rico — and exempting the territory from it, as some in the islands have advocated — raises as many questions as it answers.

The law, known as the Jones Act, requires that shipping between U.S. ports be on vessels that are U.S. built, owned, and registered, and primarily crewed by U.S. citizens.

The Government Accountability Office (GAO), a non-partisan arm of Congress, completed the study. It was requested by Puerto Rico’s resident commissioner in Washington, Pedro Pierluisi, a Puerto Rico statehood party Democrat, and the senior minority party member (Democrat) on the subcommittee with jurisdiction over the territory’s status, Gregorio Sablan, the Delegate to the U.S. House of Representatives from the other territory that uses the name “Commonwealth”, the Northern Mariana Islands.

Critics say that American shipping is more costly than foreign transportation and the cost increases the price of consumer goods in Puerto Rico. But the GAO could not substantiate that exemption from the U.S. requirements — enabling foreign shipping between the States and Puerto Rico — would lower most consumer costs.

It also cautioned that shipping service to the islands might suffer as a result.

The report suggested benefits for Puerto Rico and the nation as a whole from the law as well as some problems with current shipping but did not take positions on net impacts and solutions.

It made no recommendations and presented arguments on both sides of the issue as well as the information that the investigators could verify. The GAO noted data that would be pivotal in the debate could not be determined because of the many variables involved and that the probe was unable to obtain some key facts, in particular rate information from foreign shipping companies.

In releasing the report, Pierluisi said that he would introduce legislation to exempt Puerto Rico from the law in cases of two types of bulk cargo shipping: natural gas and other fuels and animal feed, grain, and fertilizer. The study quoted Puerto Rican purchasers as saying these types of cargo were often purchased from foreign instead of U.S. sources because U.S. vessels were not available for this cargo as well as because of cost.

There is already an exemption for Puerto Rico in the law for shipping of natural gas on vessels that were foreign-built but U.S. registered before October 19, 1996.

There is also an exemption for Puerto Rico in a Federal law similar to the cargo shipping requirements regarding tourist cruise ships sailing between the States and Puerto Rico. It applies as long as there are no U.S. cruise ships to provide service.

Last year, Pierluisi won U.S. House approval for an exemption from the Passenger Vessel Services Act for foreign built boats to carry people between ports in Puerto Rico. But the legislation, which attracted little attention in the House, was strongly opposed at the last minute by a coalition of the U.S shipping industry.

Some in Puerto Rico, including politicians who want a new “commonwealth” status for the territory and others in government and business, say that the entire law increases the cost of goods — and living — in the islands. But others, including respected economists and businesspeople as well as a thoughtful analysis by Caribbean Business, a weekly newspaper, have not agreed that the Federal law is a net economic problem for the territory.

‘Commonwealthers’ have made a total exemption a prime “commonwealth” goal.

Although exemption of a State might be politically difficult, however, it would not be unconstitutional. And a broad exemption for the territory of Puerto Rico as a whole would probably be as difficult as an exemption for a State of Puerto Rico.

It would raise the question of exemptions for the States of Hawaii and Alaska, and, the GAO pointed out, even coastal areas of the 48 contiguous States. Although some in Hawaii make arguments similar to those of exemption advocates in Puerto Rico and have worked with Puerto Rico exemption advocates, the State’s congressional delegation has long traditionally been strongly opposed to exemption, citing the other benefits of the Jones Act. Members of Congress from Alaska have also been supporters.

Legislation to exempt Puerto Rico from the Jones Act as a whole sponsored in 1996 by a few U.S. House members led by Luis Gutierrez (D-IL) was opposed by the U.S. Departments of Transportation and Defense and went nowhere in Congress.

Another idea examined by the GAO was exempting Puerto Rico — as Hawaiian exemption advocates have proposed — from only the requirement to use U.S.-built vessels. But the reasons and forces for opposition to that would be almost as strong as a total exemption.

There has been no serious, independent study of the issue in the islands. The last major Federal study — done by an Executive branch interagency team headed by an assistant secretary of Commerce in 1980 — was also inconclusive.

Freight rates are determined by a number of factors, such as supply of vessels and consumer demand, and it is difficult to determine the impact of the law on the rates for Puerto Rico shipping, the GAO reported.

Most pertinent, the impact of the law on the cost of goods cannot be determined and varies.

Most carrier operating costs — 69% in 2011, the GAO found — are non-vessel expenses such as port costs. These are not affected by the Jones Act and would equally apply to foreign vessels.

U.S. safety requirements also increase Jones Act shipping costs. These, too, would likely be imposed on foreign shipping if allowed between the States and Puerto Rico. And there might well be U.S. requirements imposed — including taxes. All could make up for most of the cost advantage of foreign shipping, which is primarily due to lower-cost foreign labor and larger foreign shipbuilding facilities.

The effects of exemption would be “highly uncertain.” It could adversely affect the reliability and other beneficial aspects of current shipping service.

The GAO reported that foreign carriers would probably not provide dedicated service between the States and Puerto Rico the way that Jones Act shipping companies do. They would likely combine stops in Puerto Rico with port calls at other locations in the region, increasing shipping times.

Ships to Puerto Rico are about 80% full on their way to the territory but only use 20% of their capacity in bringing goods from the islands to the States. Foreign shippers would probably want to fill up vessels more.

Benefits from the Jones Act include jobs for U.S. dockworkers and sailors and business for shipyards, one of the main purposes of the law.

Another purpose of the Jones Act is to guarantee a U.S. merchant marine and ship building facilities and expertise that can supplement the U.S. Navy in times of war or other national emergency.

These have also been the reason that Congresses as a whole and presidents have continued to support the law and only granted limited exemptions from it, much narrower than the exemption ideas of Puerto Rican and Hawaiian exemption adherents.

Most exemptions are for particular vessels, such as a 2011 law exempting three U.S. built and crewed but formerly foreign flagged liquid natural gas vessels from the law.

Most nations have ‘cabotage laws’ like the Jones Act. And the laws — in the U.S. as well as other countries — are not limited to water transportation but include air and land modes of services.

The GAO concluded that Jones Act shipping to Puerto Rico may result in higher freight rates for some goods — although not others — but generally ensures reliable service for the islands. The law may cause some Puerto Rico purchasers to obtain some goods abroad but this is not definitely the case. And the application of the Jones Act to Puerto Rico supports the law’s goals of assisting U.S. military preparedness and maintaining a U.S. maritime industry — but the costs of these benefits is uncertain.